As the world’s biggest manufacturer of construction, mining and some other varieties of industrial equipment, Caterpillar (CAT, Financial) makes good quality products and has a worldwide network of dealers. However, the last 2-3 years have not been good for the company and the stock has taken a beating in the market, falling over 30% from its 52-week high of over $111 to its 52-week low of below $79, and it still lingers below the $83 level since breaching it over a month ago. This is in contrast to Deere & Company (DE, Financial), its closest competitor, whose shares have traded more range-bound and currently trade at just about 7% discount from its 52-week high. So is this a good time to buy Caterpillar shares?
Headwinds galore
The company faces trouble from a slowdown in both the mining industry and reduced oil production. Caterpillar’s resource industry segment that deals with mining has taken a massive hit from the slowdown in countries like China and the Asia-Pacific region in general that were huge consumers of commodities like iron and copper ores. Consequently, the segment has seen a huge decline of over 53% in sales (about $11 billion) and an even more massive decline of over 88% (about $7.8 billion) in profits in the three years from 2012 to 2014.
The oil and gas industry is a primary end market for Caterpillar’s energy and transportation segment which became the biggest profit churner for the company since the decline of mining in 2013. Serving diverse industries, this segment is still coming under pressure from the crash in oil prices. The company’s muted outlook for 2015, expecting a 10% fall from $55.2 billion to $50 billion in revenue generated, highlights the decline in oil prices as a major contributing factor.
International business
For a company that generates more than half its revenue outside the U.S., Caterpillar has had to face serious pressure from a strong dollar on multiple fronts. A weak euro has been especially bad, since the company generates about a quarter of its revenue from Europe. A weak yen has allowed Japanese companies like Komatsu (KMTUY, Financial) to underbid Caterpillar for various projects. Other currencies in Asia/Pacific have also lost against the dollar and this has significantly reduced demand from those regions too.
Apart from currencies, the slowdown in China, the second biggest economy in the world, bodes especially badly for Caterpillar. The slowed construction activity there translates to lesser construction machinery needed, in direct terms. In indirect terms, it also needs lesser iron and steel, which in turn translate to lesser mining equipment need.
Value for investors
Despite an unexciting performance last year, Caterpillar still increased its dividend to the current 3.41%, which is pretty decent. From an approved repurchase plan of shares worth $10 billion, the company has already bought back stock worth $4.2 billion, and plans to buy more shares in 2015.
Conclusion
There seems to be nothing good going for the company right now but what could be good news for potential investors is that the markets seem to have already priced in all the negative news surrounding the company, and the upside, when it comes, will be a pleasant surprise. There is still no certainty, however, of a time frame when the company’s fortunes will turn around. We recommend waiting for a dip below the $80 level to BUY this stock for long-term holding. Above that level, it will not be a wise purchase.
